Key points to remember
- The Federal Reserve raised interest rates an additional 75 basis points.
- The US central bank funds rate is now 3% to 3.25%.
- As the Fed remains determined to rein in inflation and the crypto has no new narratives on the horizon, the market may continue to suffer for some time to come.
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The Fed’s latest rate hike comes after the latest consumer price index recorded a higher-than-expected inflation rate of 8.3% in August.
Fed announces another rate hike
The Federal Reserve announced another interest rate hike of 75 basis points.
The U.S. central bank revealed the rate hike on Wednesday at the latest meeting of the Federal Open Market Committee.
The rate hike follows four previous increases of 75 basis points earlier this year, taking the Fed funds rate from 3% to 3.25%.
Today’s decision was widely expected, especially after inflation rates hit warmer than expected September 13. The latest consumer price index data showed inflation hit 8.3% in August, 20 basis points higher than estimates for a rate of 8.1%. Fed Chairman Jerome Powell made it clear that the US central bank was committed to raising rates in Jackson Hole last month when he warned new “pains” ahead for the markets.
Global markets have been rocked by Fed decisions throughout 2022. As Powell announced further rate hikes, markets panicked back and forth. While the July hike led to a push as the 75 basis point call was lower than initially feared, rate hikes generally hit risky assets as the cost of borrowing money becomes more expensive. Crypto assets such as Bitcoin and Ethereum have traded in close correlation with traditional equities following previous changes in Fed funds rates.
The crypto market reacted steadily; the total cryptocurrency market cap is up 1.6% in the past 24 hours, but Bitcoin and Ethereum are down 1.2% and 1.4% respectively on the day.
The Fed’s Impact on Crypto
Crypto assets have had a tough year since the market peaked at $3 trillion in November 2021. As the market had already reached exhaustion after more than a year of bullish price action on the late last year, the Fed had a major influence in the current winter phase. .
By CoinGecko data, Bitcoin and Ethereum are currently at over 70% of their highs, with many small-cap assets faring even worse. Inflation, meanwhile, is still at 8.3%. Although inflation is down from the 40-year highs recorded in June, it remains well above the Fed’s 2% target.
Powell reiterated in Jackson Hole that the bank was aiming for a 2% rate, indicating that it would remain hawkish for some time to come. If Powell sticks to his guns, the Fed funds rate could rise further in the coming months, which could once again rattle markets.
The crypto market had shown signs of a possible recovery over the summer, propelled mainly by anticipation of Ethereum’s historic “Merge” event. However, ETH took a nosedive as CPI printing fell last week, then tumbled further even after the merger shipped without a hitch. It’s down about 15% in the week since the update.
Bitcoin also had a dismal performance in September, slipping below $19,000 on several occasions. It suffered alongside Ethereum following the merger. Both assets are trading above their lows in June when the market fell due to an industry-wide liquidity crisis stemming from the collapse of the Terra ecosystem. Bitcoin posted a record 11 weekly red candles, erasing its 2021 gains as it hit 18-month lows. Still, it’s unclear whether the chaos of June has bottomed out or if prices could fall further.
The crypto market is notorious for its cyclical nature, but narratives play a key role in this notoriously volatile space. The crypto has currently been in a downtrend for nearly a year, which has historically indicated that a recovery may be on the horizon. However, with the possibility of further rate hikes from the Fed and no established narrative like the meltdown making the rounds, crypto hopes can wait before sentiment changes and the trend reverses.
The global cryptocurrency market capitalization is currently $982 billion, down more than 67% from its all-time high.
Disclosure: At the time of writing this article, the author of this article owned ETH and several other cryptocurrencies. This story is breaking and will be updated as new details emerge.